I was doing analysis for a project to be taken which is for a short duration and which has inconsistent discount rates to be applied, thus I cannot use Modified IRR and neither NPV, but I am facing a problem of multiple IRR, which seems to be completely inaccurate so is there any other technique or method to deal with Multiple IRR and also no IRR(just for information).
1 Answer
The interpretation of the IRR of a series of cash flows is "at what constant interest rate could I invest/borrow the cash flows to end up with the same amount at the end". Yes it is possible to get multiple IRRs, and NO IRR. For multiple IRRs, none of them are "wrong" based on the definition, but you could pick the one that is most reasonable. Often times you'll get one positive and one negative, and unless the positive rate is absurdly high, it is more reasonable than the negative IRR.
No IRR typically means that the project is impossible to replicate just by investing (e.g. only positive cash flows). In that case, IRR is irrelevant, and some other measure must be used to quantify the project.
Also, you CAN use NPV with "inconsistent discount rates" - NPV is just the sum of all cashflows discounted at their appropriate rate. There's nothing in the NPV method that requires a constant discount rate (in fact the discount rate is often NOT constant).
